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Hearing Date and Time: Objection Deadline:

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK -----------------------------------------------------------x : In re : : DYNEGY HOLDINGS, LLC., et al., : : : Debtors. : ----------------------------------------------------------- x

Chapter 11 Case No. 11-38111 (CGM) Jointly Administered

MOTION OF THE UNITED STATES TRUSTEE FOR AN ORDER DIRECTING THE APPOINTMENT OF A CHAPTER 11 TRUSTEE PURSUANT TO SECTION 1104 OF THE BANKRUPTCY CODE Tracy Hope Davis, the United States Trustee for Region 2 (the "United States Trustee"), respectfully moves this court for an order directing the appointment of a chapter 11 trustee in the above-referenced cases pursuant to section 1104(a)(1) of the United States Bankruptcy Code (the Bankruptcy Code), 11 U.S.C. 101 et seq. In support of this motion (the Motion), the United States Trustee respectfully states as follows: PRELIMINARY STATEMENT The United States Trustee seeks an order directing the appointment of a chapter 11 trustee under section 1104(a)(1) of the Bankruptcy Code. Based upon the findings and conclusions of the Examiner, there are ample grounds for the appointment of a chapter 11 trustee. The mismanagement of the Debtors by their current management to the financial detriment of the Debtors creditors provides cause for the appointment of an independent fiduciary to manage the affairs of these Debtors. In the alternative, it is in the best interest of creditors to appoint a chapter 11 trustee. 1

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With respect to cause, the Report issued by the Court ordered independent fiduciary presents information that, at a minimum, demonstrates gross mismanagement on the part of current management. As found by the Examiner, the Dynegy Holdings board has repeatedly breached its fiduciary duties to Dynegy Holdings. Whether ultimately the Examiners conclusions regarding an actual fraudulent transfer or constructive fraudulent transfer of valuable assets of Dynegy Holdings are sustained by this Court, nonetheless, the breaches of duty of the various boards all alter egos of one another to the financial detriment of the Debtors, demonstrates cause for the appointment of a chapter 11 trustee within the provisions of Section 1104(a)(1) of the Bankruptcy Code. The appointment of a chapter 11 trustee is also in the best interest of creditors. The Examiners Report contains serious issues for the Debtors that need to be swiftly addressed and resolved in order to bring these cases to a successful conclusion. Current management is not in a position to assess the findings and conclusion of the Examiner, and to pursue any and all of the appropriate remedies. Only a chapter 11 trustee will have the statutory authority to do so and to assume all the duties and responsibilities of a debtor-in-possession. Accordingly, the United States Trustee urges the Court to appoint a chapter 11 trustee under section 1104(a) as ample cause is demonstrated. FACTS A. General Background 1. On November 7, 2011 (the Petition Date), Dynegy Holdings and its debtor

subsidiaries and affiliates commenced a voluntary case under Chapter 11 of the Bankruptcy Code

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(collectively referred to as the Debtors).1 Dynegy, Inc. is Dynegy Holdings non-debtor parent and sole equity owner (hereinafter, all the Dynegy entities are referred collectively as Dynegy). 2. Dynegy Holdings is a holding company that conducts its business operations

through its direct and indirect subsidiaries, including the other Debtors. Its primary business is the production and sale of electric energy, capacity and ancillary services. See Second Amended Disclosure Statement at Section VI.C. 1, ECF Doc. No. 472. 3. The Debtors continue to operate their businesses and manage their properties as

debtors-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 4. On November 16, 2011, the United States Trustee appointed an Official

Committee of Unsecured Creditors pursuant to section 1102(a) of the Bankruptcy Code. ECF Doc. No. 85. B. The Pre-Petition Restructuring Transactions 5. On August 4, 2011, Dynegy Inc., Dynegy Holdings and certain of their direct and

indirect subsidiaries implemented an internal reorganization which restructured the Debtors coal and natural gas operations into two new ring fenced indirect subsidiaries of Dynegy Holdings. See Second Amended Disclosure Statement VI.E. 6. On August 5, 2011, certain Debtors and their non-debtor parent corporations

obtained a total of $1.7 billion in new financing secured by the assets of all of Dynegy Inc.s operating subsidiaries other than Dynegy Roseton and Dynegy Danskammer. Id. at VI.H.

Unless otherwise specified, this Motion incorporates the defined terms used in the Examiners Report. 3

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7.

On September 1, 2011, through a series of complex debt assumption transactions,

non-debtor Dynegy, Inc. acquired the assets of the coal and natural gas operations, with Dynegy Holdings retaining the stock in those subsidiaries (collectively, the August and September 2011 transactions set forth herein are defined as the Pre-Petition Restructuring Transactions). Id. C. The U.S. Bank Motion to Appoint an Examiner 8. On November 11, 2011, U.S. Bank, N.A. (U.S. Bank), the successor indenture

trustee with respect to the sale-leaseback financings associated with Dynegy Holdings acquisition of the Newburgh Plants, filed a motion to appoint an examiner to investigate and report on the conduct of the Debtors and their directors in connection with the Pre-Petition Restructuring Transactions. ECF Doc. No. 48. 9. U.S. Bank alleged that the Pre-Petition Restructuring Transactions resulted in a

significant portion of Dynegy Holdings assets being transferred to Dynegy, Inc. in exchange for an unsecured Undertaking worth less than two thirds of the value Dynegy Holdings ascribed to those assets, without (i) notice to creditors, (ii) a third party marketing process or (iii) review by independent directors. Id. at 31-33. U.S. Bank also alleged that Dynegy Holdings board knew its actions were improper and breached its fiduciary duties. Id. at 33. D. The Appointment of the Examiner 10. After a hearing on December 16, 2011, the Court directed the appointment of an

examiner to investigate and report on, inter alia, the validity of the Prepetition Restructuring Transactions and on December 29, 2011, the Court entered an order granting the Examiner Motion (the Examiner Order). ECF Doc. No. 276.

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11.

By Order dated January 11, 2012, the Court approved the United States Trustees

appointment of Susheel Kirpalani as the examiner (the Examiner). ECF Doc. No. 318. 12. The Examiner Order directed the Examiner to conduct and unfettered

investigation of: (i) the Debtors conduct in connection with the prepetition 2011 restructuring and reorganization of the Debtors and their nonDebtor affiliates (including, without limitation, pre-petition transactions); any possible fraudulent conveyances; and Whether [Dynegy Holdings] is capable of confirming a chapter 11 plan.

(ii) (iii)

See Examiner Order at 2. 13. The Examiner Order also provided that the Examiner may act as mediator

between or among the parties in interest to the extent the examiner determines mediation may be beneficial to the progress of these cases . . . . Id. The Examiner Order further provides that: To the extent that the examiner must include confidential or privileged material in any report submitted to the Court, the complete report shall be made only to the Court, under seal, with a copy to the party claiming privilege or confidentiality, and such report shall be redacted or otherwise protected prior to the examiners transmission of it to other parties. The redacted report, if any, shall be filed on the docket . . . The Debtors (or any of them) may designate any information as privileged, work product or confidential, in which case the examiner shall treat such information as designated, unless otherwise ordered by the Court; provided, that the examiner or any party in interest may challenge such designation and the Court shall have jurisdiction to determine any such challenge... (the Sealing Provision). Id. at 4.

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14.

The Examiner filed his written report (the Examiners Report) on March 9, 2012.

ECF Doc. No. 490. The Examiners Report contains an executive summary (theExecutive Summary) and the findings of the Examiner. Much of the information upon which the Examiner based his findings has been redacted in accordance with the Sealing Provision.2 E. The Examiners Report 15. The Examiner found that there were two phases of Dynegys restructuring

strategy. The first phase, the Ring Fencing Transactions, involved transfers of assets incident to the creation of two distinct silos of assets, CoalCo and GasCo. The Examiner found that this strategy was permissible because the transfer did not and was not intended -- to injure creditors. Examiners Report, pp. 115-117. 16. The Examiner determined that the transfer of Dynegy Holdings opportunity to

restructure indebtedness did not constitute a fraudulent conveyance. Id., pp.117-118. 17. The second phase of the restructuring ultimately involved the transfer or purported

sale of CoalCo by Holdings to Dynegy Inc., in exchange for a piece of paper called the Undertaking that Dynegy Inc. actively avoided valuing. Id., pp. 2-3. 18. The Examiner concluded that the CoalCo transfer was made with the intent to

hinder and delay but not necessarily to defraud the creditors of Dynegy Holdings. Id., pp. 119-125.

The Examiner has proposed a procedure whereby some or all of the redacted information may be unsealed at some future date by agreement between the Examiner and the parties-ininterest, or by the Court. Examiners Report, pp. 19, 24. The United States Trustee reserves her rights with respect to filing an objection with respect to any or all of the information which may not be ultimately unsealed in accordance with the unsealing procedures proposed by the Examiner. 6

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19.

The Examiner concluded that the transfer of CoalCo to Dynegy Inc. was an actual

fraudulent transfer (id., p. 4; pp. 125-129), and assuming that Dynegy Holdings was insolvent on the date of the transfer (approximately two months before the bankruptcy filing), a constructive fraudulent transfer and a breach of fiduciary duty by the board of directors of Dynegy Holdings. Id., p. 4; pp. 131-143. CoalCo was exchanged for an Undertaking worth significantly less than $1.25 billion (the present value to Dynegy Holdings was no more than $862 million) and did not constitute reasonably equivalent value for the CoalCo assets. Id., pp. 127-129. The Examiner characterized the Undertaking as an illiquid, unsecured, highly unusual financial instrument. Id., p. 2. The CoalCo transfer, reduced to its essence, transferred hundreds of millions of dollars away from Dynegys creditors in favor of its stockholders. Id., p. 3. 20. The Examiner concluded that Dynegy Inc., through its board of directors,

controlled the affairs of Dynegy Holdings to the detriment of Dynegy Holdings for the benefit of Dynegy Inc. Id., p. 4. Accordingly, the Examiner found that Dynegy Inc. as well as the newly created subsidiary DGI, which was used to effect the CoalCo transfer, should be considered alter egos of Dynegy Holdings. Id., p. 4; p. 118. Furthermore, the Examiner concluded that the breach of fiduciary duty by the board of directors of Dynegy Holdings should be equally attributed to the board of directors of Dynegy Inc. Id., p. 4. 21. The Examiner found that while certain members of the Dynegy Inc. board did not

understand the CoalCo transfer or its ramifications; other members, in particular the members of the boards Finance and Restructuring Committee (the FRC), knew exactly what was happening. Id., p. 4. The Examiner determined that in reviewing the CoalCo transfer, the Dynegy Inc. board relied upon the recommendation of the FRC. Id. The Examiner noted that the 7

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members of the FRC installed themselves as the majority of members of the Dynegy Holdings board shortly before the commencement of these Chapter 11 cases. Id., p. 4, n.7. 22. The Examiner found no evidence that the directors of Dynegy Holdings ever

attempted to determine whether Dynegy Holdings was insolvent. Id., p. 135. The Examiner stated that Dynegys Chief Executive Officer indicated that he believed Dynegy Holdings was insolvent when he joined the company in June 2011. Id., p. 8. The Chief Executive Officer was also on the Dynegy Holdings board. Id. 23. The Examiner reported that the insolvency of Dynegy Holdings divided the

loyalties of its directors because each was an officer of Dynegy Inc., and in one case, also a director of Dynegy Inc. Id., p. 135. The Examiner concluded that the Dynegy Holdings board breached its duties of loyalty to Dynegy Holdings regardless of whether the board knew that Dynegy Holdings was insolvent, misunderstood the import of being insolvent, or had a good faith belief that it was permissible to benefit Dynegy Inc. at the expense of Dynegy Holdings. Id., p. 138. 24. The Examiner further reported that the three most senior Dynegy Inc. officers also

served as board members of Dynegy Holdings and Dynegy Gas Investments, LLC (DGI), and these boards did not appreciate that what might be good for the ultimate parent, Dynegy Inc., may not be good for Dynegy Inc.s insolvent subsidiary, Dynegy Holdings. Id., p. 3. The Examiner found that these officers did not understand the distinction from a corporate and fiduciary prospective possibly because the same professionals advised all the entities within the consolidated Dynergy family of companies. Id.

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25.

The Examiner noted that at the point of insolvency, the interests of Dynegy

Holdings and Dynegy Inc. diverged, creating a conflict of interest for its legal advisors, W&C, who were retained in April 2011 to represent Dynegy Inc., Dynegy Holdings, and other Dynegy Inc. subsidiaries regarding the restructuring of Dynegy Inc. and its subsidiaries and related matters. Id., p. 8; pp. 144-146. 26. The Examiner found that W&C understood that it was representing each entity

within the Dynegy organization. W&C retained Lazard as its financial advisors to provide services in connection with the restructuring for the benefit of all of the Dynegy entities. Id., p. 8. W&C and Lazard were initially retained on terms that included the potential for contingency fees tied to increases in the stock price of Dynegy Inc. Id., pp. 8-9. In August 2011, both W&C and Lazard amended the terms of their engagement to eliminate the contingency feature, although W&C advised the Examiner that the amendment to its engagement was done orally, subject to definitive documentation, which had not yet been completed.3 Id., p. 9; n.11. 27. The Examiner found that W&C did not perceive any conflicts with simultaneously

representing both Dynegy Inc. and Dynegy Holdings because W&C said it believed Dynegy Holdings to be solvent at all relevant times. Id., p. 9. Lazard did not perform any solvency analysis for any entity, because it was not in the business of performing such analyses. Id. 28. The Examiner found that if Dynegy Holdings was insolvent at the time of the

transfer, then the Dynegy Holdings board should have been seeking to maximize the value of Dynegy Holdings for its true economic beneficiaries its creditors not its parent stockholder,
3

Although not mentioned in the Examiners Report, the Debtors had sought to retain W&C as special counsel. After objections were filed by the United States Trustee and others, the application was withdrawn. ECF Doc. Nos. 91, 162, 166, 169, 182 and 253. 9

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Dynegy Inc., and its stockholders. Id., p. 9. Thus, assuming insolvency, the restructuring that was intended to reduce the value of Dynegy Holdings for the benefit of the parent company, under Delaware law, amounted to a breach of the fiduciary duty of loyalty. Id., p. 9. 29. The Examiner stated that it is technically possible for Dynegy Holdings to propose

a confirmable plan of reorganization. Id., p. 10. In connection with the Plan as currently proposed, the Examiner noted that the transfer of CoalCo to Dynegy Inc., which moved assets from Dynegy Holdings to its parent, was an invitation for protracted litigation as creditors of Dynegy Holdings would engage in litigation to restore value back to Dynegy Holdings. Id., p. 11. The Examiner suggested that other parties in interest file competing plans and that creditors should be given an opportunity to vote on those plans. Id. 30. Finally, in light of the conduct of all but one of the members of the board of

Dynegy Holdings, the Examiner recommended that no plan be proposed or confirmed that would provide for the non-officer members of the Dynegy Inc. board to serve as members of the Dynegy Holdings board. Id., p. 11. C. The Disclosure Statement and Plan 31. On November 7, 2011, the Dynegy Inc. and Dynegy Holdings entered into the

RSA with holders of approximately $1.4 billion of its senior notes, which included, as a condition to the consummation of a chapter 11 plan, the requirement that the aggregate claims arising from the Newburgh Plant leases do not exceed $300 million. See Second Amended Disclosure Statement at VI.F. 32. On December 26, 2011, Dynegy Holdings, Dynegy Inc. and the holders of

approximately $1.8 billion in senior notes and subordinated notes entered into an amended RSA. 10

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Id. at VI.G. The amended RSA provides that it may be terminated if certain milestones are not met (1) if the Disclosure Statement is not approved by March 15, 2012, (2) if a Plan has not been confirmed by June 15, 2012, or (3) if the Plan has not become effective by August 1, 2012. Id. The amended RSA also provides that a consenting noteholder may terminate its obligations under the Agreement if an examiner finds that any member of Dynegy Holdings board of managers has committed acts of fraud, willful misconduct, breach of fiduciary duty or any other act which would likely make them unable to satisfy the standards of section 1129(a)(5)(A)(ii) of the Bankruptcy Code. Id. 33. On December 1, 2011, Dynegy Holdings and Dynegy Inc., filed a chapter 11 plan

of reorganization and related disclosure statement. ECF Doc. Nos. 123 and 124. On January 19, 2012, Dynegy Holdings and Dynegy Inc. filed an amended Plan and Disclosure Statement. ECF Doc. Nos. 343 and 344. 34. In response to numerous objections filed by, among others, the United States

Trustee, the Creditors Committee and U.S. Bank (ECF Doc Nos. 412, 421 and 397), on March 5, 2012, Dynegy Holdings and Dynegy Inc. filed the Second Amended Joint Plan of Reorganization and related Disclosure Statement. ECF Doc. Nos. 472, 473. 35. The Disclosure Statement hearing is scheduled for March 12, 2012.

III. DISCUSSION A. The Appointment of a Trustee is Required The appointment of an independent fiduciary is warranted in this case under subsection (a)(1) of section 1104(a) of the Bankruptcy Code. Specifically, 11 U.S.C. 1104(a) provides:

11

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At any time after the commencement of the case but before confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of a trustee (1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor. . . . (2) if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate, without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor [ ].

11 U.S.C. 1104(a)(1), (a)(2).4 A finding of cause under 1104(a)(1) mandates the appointment of a trustee. Oklahoma Refining Co. v. Blaik (In re Oklahoma Refining Co.), 838 F.2d 1133, 1136 (10th Cir. 1988); In re V. Savino Oil & Heating Co., Inc., 99 B.R. 518, 525 (Bankr. E.D.N.Y. 1989). The list of wrongs constituting cause is non-exclusive; thus [f]actors relevant to the appointment of a trustee under 1104(a)(1) include: conflicts of interest, including inappropriate relations between corporate parents and the subsidiaries; misuse of assets and funds; inadequate record keeping and reporting; various instances of conduct found to establish fraud or dishonesty; and

Bankruptcy Code Section 1104(e) provides that the United States Trustee shall move for the appointment of a chapter 11 Trustee under subsection (a) if there are reasonable grounds to suspect that current members of the governing body of the debtor, the debtors chief executive or chief financial officer, or members of the governing body who selected the debtors chief executive or chief financial officer, participated in actual fraud, dishonesty or criminal conduct in the management of the debtor or in the debtors public financial reporting. 11 U.S.C. 1104(e). The Examiners Report suggests at a minimum that there has been dishonesty on the part of current management of the Debtors. Therefore, the United States Trustee is seeking the appointment of a trustee, pursuant to 11 U.S.C. 1104(a)(1) & (2). 12

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lack of credibility and creditor confidence. In re Altman, 230 B.R. 6, 16 (Bankr. D. Conn. 1999), affd in part, vacated in part, 254 B.R. 509 (D. Conn. 2000). The court need not find any of the enumerated wrongs to find cause for appointing a trustee. Oklahoma Refining, 838 F.2d at 1136. Through section 1104(a)(1) of the Bankruptcy Code, Congress has mandated that a chapter 11 debtor-in-possession, who acts as a fiduciary of the bankrupt estate, be an honest broker. See Commodity Futures Trading Commn v. Weintraub, 471 U.S. 343, 355 (1985) ([T]he willingness of courts to leave debtors in possession is premised upon an assurance that the officers and managing employees can be depended upon to carry out the fiduciary responsibilities of a trustee.). When a debtor in possession, its management, or its professionals have exhibited an inability or unwillingness to comply with their basic fiduciary duties, there is but one remedy established by Congress to supplant management while allowing the case to remain in chapter 11: the appointment of a trustee pursuant to 11 U.S.C. 1104(a). See In re V. Savino Oil, 99 B.R. at 526 (And if the debtor-in-possession defaults in this respect, [s]ection 1104(a)(1) [of the Bankruptcy Code] commands that stewardship of the reorganization effort must be turned over to an independent trustee.). In turn, section 1104(a)(2) of the Bankruptcy Code allows appointment of a trustee even when no cause exists.5 See In re Sharon Steel Corp., 871 F.2d 1217, 1226 (3d Cir. 1989); In re Ionosphere Clubs, Inc., 113 B.R. 164, 168 (Bankr. S.D.N.Y. 1990). Under section 1104(a)(2), the Court may appoint a trustee, in its discretion, to address the interests of the creditors, any
5

Should the Court decline to direct the appointment of a Chapter 11 Trustee under section 1104(a)(1), there are grounds to support an order directing the appointment under section 1104(a)(2). 13

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equity security holders, and other interests of the estate. 11 U.S.C. 1104(a)(2). See, e.g., Sharon Steel, 871 F.2d at 1226; Comm. of Dalkon Shield Claimants v. A.H. Robins Co., 828 F. 2d 239, 242 (4th Cir. 1987). Under section 1104(a)(2), courts look to the practical realities and necessities. In re Adelphia Comms Corp., 336 B.R. 610, 658 (Bankr. S.D.N.Y. 2006), affd, 342 B.R. 122 (S.D.N.Y. 2006); In re Euro-American Lodging Corp., 365 B.R. 421, 427 (Bankr. S.D.N.Y. 2007). Accordingly, the standard for appointment of a chapter 11 trustee under section 1104(a)(2) is flexible. Adelphia; 336 B.R. at 658; In re The 1031 Tax Group, LLC, 374 B.R. 78, 90-91 (Bankr. S.D.N.Y. 2007). Among the factors considered by the courts in assessing motions brought under this section include (1) the trustworthiness of the debtor, (2) the debtors past and present performance and prospects for rehabilitation, (3) the confidence or lack thereof of the business community and of creditors in present management, and (4) the benefits derived from the appointment of a trustee, balanced against the cost of the appointment. Adelphia; 336 B.R. at 658; Euro-American, 365 B.R. at 427; 1031 Tax Group, 374 B.R. at 91. B. Cause Exists for the Appointment of a Chapter 11 Trustee Under Section 1104(a)(1) If the estates fiduciaries are found to have engaged in fraud, dishonesty, incompetence, or gross mismanagement, due to acts or omissions which occurred either prior to or following the Petition Date, this Court, pursuant to section 1104(a)(1), must direct the appointment of a trustee.6 Sharon Steel, 871 F.2d at 1226 ([11 U.S.C. 1104](a)(1) requires the bankruptcy
6

A number of courts have indicated that grounds for the appointment of a trustee must be established by clear and convincing evidence. See In re G-I Holdings, Inc., 385 F.3d 313 (3rd Cir. 2004). In light, however, of Supreme Court precedent and the recent addition of section 1104(e) to the Bankruptcy Code, the better view is that the appropriate burden of proof should be preponderance of the evidence. See Tradex Corp. v. Morse, 339 B.R. 823, 829-32 (D. Mass. 14

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court, [ ] to appoint a trustee when the movant has proved cause, which the statute defines to include incompetence and gross mismanagement.); In re 1031 Tax Group, LLC, 374 B.R. at 86 (When considering whether to appoint a trustee for cause, a courts focus is on the debtors current management [and] a court may consider both the pre- and postpetition misconduct of the current management).7 The Examiners Report, although not a ruling by the Court, presents compelling reasons for a finding of cause for the appointment of a chapter 11 trustee based at a minimum on gross mismanagement by current management. The Court ordered independent fiduciary conducted a thorough investigation and concluded that the Dynegy Holdings board breached its duties of loyalty to Dynegy Holdings regardless of whether the board knew that Dynegy Holdings was insolvent, misunderstood the import of being insolvent, or had a good faith belief that it was permissible to benefit Dynegy Inc. at the expense of Dynegy Holdings. See Examiners Report, p. 138. [T]he willingness of courts to leave debtors in possession is premised upon an assurance that the officers and managing employees can be depended upon to carry out the fiduciary responsibilities of a trustee. Commodity Futures Trading Commn v. Weintraub, 471 U.S. 343, 355. When a debtor in possession, its management, or its professionals have exhibited an inability or unwillingness to comply with their basic fiduciary duties, there is but one remedy

2006) (citing Grogan v. Garner, 498 U.S. 279, 286 (1991)). Cf. In re Bayou Group, LLC, 564 F.3d 541, 546 (2d Cir. 2009) (dicta). In The 1031 Tax Group, 374 B.R. 78, the Court denied the United States Trustees motion to appoint a chapter 11 trustee under Bankruptcy Code sections 1104(a)(1) and (a)(2) on August 13, 2007. The United States Trustee filed a subsequent trustee motion under section 1104(a)(2), which was granted on October 23, 2007. The 1031 Tax Group, Case No. 07-11448 (MG), Amended Memorandum Opinion and Order, ECF Doc. No. 812. 15
7

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established by Congress to supplant management while allowing the case to remain in chapter 11: the appointment of a trustee pursuant to 11 U.S.C. 1104(a). See In re V. Savino Oil, 99 B.R. at 526 (And if the debtor-in-possession defaults in this respect, [s]ection 1104(a)(1) [of the Bankruptcy Code] commands that stewardship of the reorganization effort must be turned over to an independent trustee.). Among the myriad of specific examples provided by the Examiner of breaches of the fiduciary duties of the respective boards of Dynegy Holdings and Dynegy Inc., the Examiner found that while certain members of the Dynegy Inc. board did not understand the CoalCo transfer or its ramifications, other members, in particular, the FRC, who installed themselves as the majority of the Dynegy Holdings board prior to the filing of the Chapter 11 cases, knew exactly what was happening. See Examiners Report, p. 4, n.7. The Examiner determined that in reviewing the CoalCo transfer, the Dynegy Inc. board relied upon the recommendation of the FRC. Id. The Examiner also concluded that Dynegy Inc., through its board of directors, controlled the affairs of Dynegy Holdings to the detriment of Dynegy Holdings for the benefit of Dynegy Inc. Id., p. 4. Significantly, the Examiner concluded that Dynegy Inc. and Dynegy Holdings subsidiary, DGI, which was used to effect the CoalCo transfer, should be considered alter egos of Dynegy Holdings. Accordingly, the Examiner found that the breach of fiduciary duty by Dynegy Holdings should be equally attributable to the board of directors of Dynegy Inc. Id. The Examiner also found that there was no evidence that the directors of Dynegy Holdings ever attempted to determine if Dynegy Holdings was insolvent. Ironically, there apparently was no such determination despite the Chief Executive Officers assertions to the 16

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Examiner that when retained by Dynegy Inc. in June 2011, he was of the opinion that Dynegy Holdings was insolvent. Id., p. 8. Yet, although the Chief Executive Officer thought Dynegy Holdings was insolvent, and although he served as a member of the Dynegy Holdings board, the Examiner found that a solvency analysis was never undertaken, see id., p. 135, nor were appropriate fiduciary duties exercised. It was critical for fiduciaries of Dynegy Holdings to undertake an insolvency analysis because the Examiner found that at the point of insolvency, the interests of Dynegy Holdings and Dynegy Inc. diverged. See Examiners Report, p. 8, pp. 144146. The divergency of these interests also created a conflict of interest for the legal advisors, W&C. As stated above, W&C, was retained by Dynegy Inc. to assist Dynegy with its restructuring objectives. Id., p. 8. Dynegy Holdings did not have separate legal counsel for these purposes, another reason indicative of a breach of the fiduciary duties owed by the Dynegy Holdings board to Dynegy Holdings. The Examiner also found that the transfer of CoalCo to Dynegy Inc. was an actual fraudulent transfer (id., p. 4; pp. 125-129), and if Dynegy Holdings was insolvent at the time of the transfer, the transfer was a constructive fraudulent transfer and a breach of fiduciary duty by the Dynegy Holdings board. Id., p. 4, pp. 131-43. Under similar circumstances, in Sharon Steel, 871 F.2d 1217, the Third Circuit affirmed the Bankruptcy Court's decision to appoint a trustee under 1104(a)(1) and (2). In Sharon Steel, the Court stated that the finding by the Bankruptcy Court of numerous pre-petition transfers of the debtor's assets "amounted at best to voidable preferences and at worst to fraudulent conveyances, none of which had been questioned by the debtor-in-possession." Id., at 1220. 17

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Further, in Sharon Steel, the Bankruptcy Court questioned the current management's ability to fulfill its fiduciary duty to pursue these claims since the debtor shared common management with the recipients of the transfers, who also owed conflicting fiduciary duties to the recipients. Id. at 1220. The Third Circuit found that disclosure of the transfers did not cure the preferential or fraudulent transfers. When debtor's management appear[ed] to have engaged on the eve of bankruptcy in a systematic syphoning of [the debtor's] assets to other companies under common control. . . [S]uch behavior raises grave questions about current management's ability to fulfill its fiduciary duty as debtor-in-possession to [the debtor's] creditors. Judicial intervention enabling the committee to sue for recovery of per se voidable preferences and fraudulent conveyances may have solved that isolated management problem, but it has not cleared up the question about current management's fitness to continue running [the debtor] and its commitment to see it through to a successful reorganization . . . . Corrective measures that are too few too late cannot defeat a change in command." Id., at 1228. Similarly, the facts herein also present the need for the immediate appointment of a chapter 11 trustee because current management cannot continue to serve. Moreover, the decision of the directors and officers of Dynegy Inc. to transfer or sell CoalCo from Dynergy Holdings in exchange for an Undertaking that had a present value to Dynegy Holdings of no more than $862 million, further supports the appointment of a chapter 11 trustee for cause. According to the Examiner, Dynegy Inc. valued CoalCo at the time of the transfer at $1.25 billion. Examiners Report, p. 88. In return, Dynegy Holdings received an illiquid, unsecured, highly unusual instrument. Examiners Report, p. 2. This fraudulent

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transfer resulted in a loss of a valuable asset for an unsecured, unusual instrument is again demonstrative of gross mismanagement of the Debtors. The Examiners Report, prepared by an unbiased fiduciary, establishes that serious issues exist which must be considered, and, if appropriate, acted upon by whomever is serving as estate fiduciary in these cases. The Debtors current management, including both officers and directors, are hopelessly and fatally conflicted from evaluating the validity of the Examiners conclusions. Under these circumstances, courts have found that a chapter 11 trustee is necessary. See, e.g., Sharon Steele, 871 F.2d at 1226. The Examiner has found that some of the directors actively sought to enrich the Debtors parent and its shareholders at the expense of the Debtors unsecured creditors. Examiners Report, p. 4. Further investigation and follow-up on the Examiners conclusions are clearly warranted, but the Debtors current management cannot legitimately investigate itself. This is not a peripheral issue that can perhaps be assigned by the Debtors current management to the Creditors Committee or to a plan trustee this is the central issue in this case. In fact, based on the Examiners Report, it appears that the Plan will no longer be supported by key constituents. Only a chapter 11 trustee will be in a position to conduct the necessary evaluation of the Examiners Report and to pursue the appropriate remedies in the best interest of creditors, including proposing a feasible plan of reorganization. Furthermore, the appointment of a chapter 11 trustee will not delay the process of confirming a feasible plan of reorganization in these cases. Nor will it delay or interfere with the process should the Examiner determine in his judgment that mediation may be beneficial to the progress in these case. In sum, the appointment of a chapter 11 trustee under section (a)(1) of the 19

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Bankruptcy Code is required, appropriate, and will assist in the effort to achieve a successful reorganization of the Debtors estates. For these reasons, there is ample cause to appoint a chapter 11 trustee under 11 U.S.C. 1104(a)(1). CONCLUSION WHEREFORE, the United States Trustee respectfully requests that this Court enter an order directing the appointment of a chapter 11 trustee, or grant such other relief as the Court deems just, fair, and equitable. Dated: New York, New York March 11, 2012 Respectfully submitted, TRACY HOPE DAVIS UNITED STATES TRUSTEE By: /s/ Susan D. Golden Susan D. Golden Eric Small Brian Masumoto Trial Attorneys Poughkeepsie Division 74 Chapel Street Suite 200 Albany, NY 12007 (518) 434-4553 and Manhattan Division 33 Whitehall Street, 21st Floor New York, New York 10004 (212) 510-0502

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